Understanding the concept of Crypto-Banking

Traders, investors, and financial institutions have all expressed interest in cryptocurrencies and its novel blockchain-based method. However, the virtual medium eliminates the convenience of spending currency in the same way that people like spending cash or currency notes. 

 

New services and platforms have recently been launched to assist users in managing bitcoin and other digital coins in their daily finances. What you need to know about cryptocurrency banking and its advantages is as follows.

 

Also Read | Improve Digital Customer Experience in Banking             

 

What is Cryptocurrency Banking?

 

Bitcoin, the world's largest and most popular cryptocurrency by market capitalization, is stored in virtual wallets with individually generated keys. Bitcoin and other digital currencies are the electronic equivalents of cash. The virtual currency isn't stored in a physical wallet. A ledger technology called blockchain makes digital currency decentralized, which means it is not controlled by a bank or central authority.

 

Because digital coins are not regulated by a central body, the term "cryptocurrency banking" is sometimes misunderstood. Exchange companies and firms that provide digital currency management services are not technically banks. 

 

Cryptocurrency banking primarily allows users to store their cash in a digital wallet or spend them in the same way they would traditional currency. People can use exchange platforms to manage their cryptocurrency balances.

 

Also Read | What is Investment Banking

 

Watch this: The Future of Crypto Banking (w/ Bill Barhydt and Raoul Pal)

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How Can Banks Become Involved in the Cryptocurrency Market?

 

To avoid falling behind, banks must learn to embrace technology and see it as a partner rather than an adversary. Cryptocurrency adoption has the potential to streamline, enhance, and modernize financial services, and there have been a number of recent industry breakthroughs that can alleviate banks' fears about the risks and allow them to focus on the potential benefits instead.

 

1. Simple Onboarding & Expert Support

 

Banks might help bring in new, less experienced individual investors by offering tools that make it easier for their consumers to adopt cryptocurrency. Inexperienced bitcoin investors, for example, may not be able to set up their own wallet to store their cryptocurrency. 

 

Rather than keeping their bitcoin "off exchange" or with an unregulated third party, they may find it more convenient and secure to keep it at a reputable banking institution.

 

Customers might invest in crypto on the back end or through other financial tools, and banks could offer interest-bearing crypto accounts. By serving as a trustworthy third party that is well-respected in the finance industry and can keep clients' funds safe, banks may be able to reduce some of the burdens of investors who aren't specialists in the subtleties of crypto.

 

2. Custody Services

 

The Office of the Comptroller of the Currency (OCC) announced in July that banks and savings associations could provide crypto custody services to customers, including maintaining unique cryptographic keys for accessing private wallets. 

 

The OCC believes that banks could safely and effectively keep either bitcoin or the key to access cryptocurrencies on a personal digital wallet for their customers.
 

3. Smart Contracts

 

Because the completion of the transaction is dependent on computer code rather than an individual's behavior, there is a lower level of trust required between parties when entering into a smart contract arrangement. Banks could help to build trust by acting as a trusted third party for smart contracts such as mortgages, commercial loans, letters of credit, and other transactions.
 

4. Concerns about security

 

Banks can assist bitcoin users with their security worries. Many users are concerned about personal wallets and exchanges being hacked. Well-known institutions may be able to assist in the protection of digital currencies from theft or hacking, putting clients' minds at ease. 

 

Bringing cryptocurrency under bank oversight may reduce criminal activity and provide the impression that cryptocurrency transactions aren't safe to outsiders.

 

Also Read | What is Cryptojacking and How to Prevent it

 

Why Are Banks Afraid of Cryptocurrencies?

 

According to a poll by the Association of Certified Anti-Money Laundering Specialists (ACAMS) and the Royal United Services Institute in the United Kingdom, nearly 63 percent of banking industry respondents see cryptocurrencies as a risk rather than an opportunity.

 

1. Decentralized Nature

 

Crypto assets were designed as a non-intermediary, non-tethered alternative to traditional banking infrastructure that isn't reliant on the capacity of a centralized government, bank, or agency. Rather of depending on centralized intermediaries in these transactions, the blockchain code and distributed structure of the blockchain are trusted.

 

Because a cryptocurrency administered by a central bank reduces the attraction of the asset in the first place, several banks do not believe they will be able to succeed in this field. The decentralized character of the currency is perceived as undermining central bank power, leading some to assume that they will be obsolete or incapable of controlling the money supply.

 

2. Volatility

 

Throughout their brief existence, the price of cryptocurrencies (particularly bitcoin) has been extremely volatile. This is due to a variety of factors such as market size, liquidity, and the number of market players. 

 

Banks perceive this as a risk because the price hasn't been steady in the past, and they feel the currency won't be a stable investment vehicle in the future.

 

Also Read | Initial Coin Offering or ICOs

 

Watch this: Could digital currencies put banks out of business? | The Economist

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What are the advantages of Crypto-Banking?

 

1. The fundamental advantage of cryptocurrency banking is that clients may utilise their digital coin balances like any other currency to make day-to-day withdrawals and purchases, much like cash, rather than storing them as an investment. 

 

Crypto debit cards, also known as bitcoin debit cards, are prepaid debit cards that are offered by cryptocurrency trading platforms.

 

2. These can be loaded with cryptocurrencies and used to make purchases from retailers who do not accept the digital currency online or in-store. 

 

To apply for a crypto card, most cryptocurrency exchanges need users to create an account and/or a digital wallet. Some platforms additionally require users to complete a Know Your Customer (KYC) verification process to verify their identity.

 

Conclusion

 

Because there is a lack of guidance and regulation surrounding digital assets, many financial institutions are hesitant to use them. Banks are also hesitant to enter the cryptocurrency field due to concerns about its security and stability; however, instead of fearing the technology's risks, banks should be looking forward to its potential benefits.

 

Financial organizations should also consider crypto as a collaborator rather than a competition. Banks can play an important role in the cryptocurrency business, providing much-needed confidence and security in an otherwise uncontrolled environment. 

 

The adoption of cryptocurrencies and blockchain technology as a whole can help to streamline procedures and propel banking into the next era of efficiency and creativity.